Discretely sampled variance and volatility swaps versus their continuous approximations
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Abstract: Discretely sampled variance and volatility swaps trade actively in OTC markets. To price these swaps, the continuously sampled approximation is often used to simplify the computations. The purpose of this paper is to study the conditions under which this approximation is valid. Our first set of theorems characterize the conditions under which the discretely sampled swap values are finite, given the values of the continuous approximations exist. Surprisingly, for some otherwise reasonable price processes, the discretely sampled swap prices do not exist, thereby invalidating the approximation. Examples are provided. Assuming further that both swap values exist, we study sufficient conditions under which the discretely sampled values converge to their continuous counterparts. Because of its popularity in the literature, we apply our theorems to the 3/2 stochastic volatility model. Although we can show finiteness of all swap values, we can prove convergence of the approximation only for some parameter values.
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Cites work
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- scientific article; zbMATH DE number 739283 (Why is no real title available?)
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- Moment explosions in stochastic volatility models
- Pricing and hedging of long dated variance swaps under a \(3/2\) volatility model
- THE EFFECT OF JUMPS AND DISCRETE SAMPLING ON VOLATILITY AND VARIANCE SWAPS
- The fundamental theorem of asset pricing for unbounded stochastic processes
- Variance swaps on time-changed Lévy processes
Cited in
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- A general property for time aggregation
- Pricing variance swaps under hybrid CEV and stochastic volatility
- The term structure of equity and variance risk premia
- Closed-form variance swap prices under general affine GARCH models and their continuous-time limits
- A closed-form pricing formula for variance swaps under MRG-Vasicek model
- Catastrophe equity put options with target variance
- A simple closed-form formula for pricing discretely-sampled variance swaps under the Heston model
- Arithmetic variance swaps
- Prices and asymptotics for discrete variance swaps
- Is the variance swap rate affine in the spot variance? Evidence from S\&P500 data
- Variance swaps valuation under non-affine GARCH models and their diffusion limits
- A NOVEL ANALYTICAL APPROACH FOR PRICING DISCRETELY SAMPLED GAMMA SWAPS IN THE HESTON MODEL
- Variance swaps with mean reversion and multi-factor variance
- Short-maturity options on realized variance in local-stochastic volatility models
- A unified model of SABR and mean-reverting stochastic volatility for derivative pricing
- Model-independent hedging strategies for variance swaps
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